Last week, courier service Shyp announced it will convert its contract workers to full-fledged W2 employees. The company’s decision bucks the surge of startups fueling the 1099 economy, which avoids paying workers benefits by classifying them as independent contractors.
“This move is an investment in a longer-term relationship with our couriers, which we believe will ultimately create the best experience for our customers,” Shyp CEO Kevin Gibbon wrote in a company blog post.
Several other companies in the on-demand economy have started to modify their business models by hiring employees. Last month, Instacart announced that some of its contractors would have the ability to become part-time employees.
Other startups that are dispatching employees for their on-demand services include Managed by Q (office cleaning and management service), Munchery and Maple (on-demand restaurants), Chariot (shared-ride service), FlyCleaners (laundry service), Parcel (package delivery) and Alfred (personal butler service).
Given that independent contractors save companies roughly 30 percent on labor costs, why would these companies choose to become official employers?
A lot of the rationale comes down to better-quality service, says Caleb Merkl, CEO of delivery-only restaurant, Maple. While it is more difficult to quantify the benefits of having employees versus the savings of using 1099 contractors, Merkl believes the former outweighs the latter.
"If you look at our delivery team, they are essentially our only point of human contact with our customers, so it's a case where who's doing the job and how they are doing it is incredibly important to our success," he told Fast Company.
It might also ensure a more stable workforce. "We spoke to a number of contractor-based startups and decided that the inconsistent availability and high turnover rate of a contractor workforce wouldn't allow for the stable operation we were looking to build,” said Parcel CEO Jesse Kaplan.
Laura Castaing, Managed by Q NYC’s general manager, agrees: "If we invest in training, career growth, and give them a job they love and want to keep, then they are going to stay committed — they will invest in a relationship with the managers at that [client] company and want to do a job and stay a long time. With independent contractors, it would be hard to guarantee that quality."
For companies providing services with special skills or required training, hiring employees helps avoid legal risks. A recent class action lawsuit against on-demand cleaning service Handy, for example, alleged that contractors were misclassified because workers were given uniforms and asked to clean in a specific way.
Uber has attempted to skirt restrictive labor laws by providing training from outside vendors. But the company is facing legal battles and protests about its service around the globe. A recent decision by the California Labor Commission ruled that a former Uber driver was in fact an employee, because the company was involved in “every aspect” of the business operation — from providing phones to drivers, to disabling the app if drivers stopped working for an extended period.
High-profile lawsuits are still pending against Uber and its competitor, Lyft, over the classification of its workers. Shannon Liss-Riordan, the lawyer that filed the suits, expressed surprise over these companies’ legal maneuvers to Upstart Business Journal last week.
"I continue to be amazed to see how many new companies recently have gotten the idea that it’s OK to classify their workforce as independent contractors when they are treating them as employees,” she said. "The companies are setting rules and guidelines, and threatening termination when the workers don’t follow those rules.”
"Of course, they have to do that — in order to provide the branded quality service they are trying to sell to the public," she said. "It’s an inherent tension: They want to control their workers so they can provide a level of service that will grow their business, but they want to avoid labor costs, and shift the expenses of running a business to their workers.”
Prior to Shyp’s recent announcement, Liss-Riordan also sought a class-action demand on behalf of two of its couriers. But Gibbon maintains that the company’s decision to give its workers employee status was unrelated to recent lawsuits.
“We’re doing this because we want to make the Shyp experience as good as it can be, for our customers and workforce alike,” he wrote.
"I'm pleased to see that some companies are taking a step back and reversing this [contractor] trend, and deciding to classify their workers properly as employees," Liss-Riordan said in response to Shyp’s decision. "I hope more companies come to this conclusion and make these kinds of lawsuits unnecessary."
Get the latest insights, trends, and innovations to help position yourself at the forefront of sustainable business leadership—delivered straight to your inbox.
Published Jul 7, 2015 8pm EDT / 5pm PDT / 1am BST / 2am CEST